Financial Reform Watch

At Last

At last Treasury has come forward with its Public Private Investment Program for dealing with toxic assets, only now that there is a plan, the proper term is “troubled legacy assets.” Stocks have rallied since Treasury announced the plan this morning, and legislators on Capitol Hill have halted their rush to claw back the AIG bonus money, some say partly in order to study the new plan. The Treasury Secretary is scheduled to testify before the House Financial Services Committee on Thursday. Will the positive momentum continue up to and following his hearing performance? Secretary Geithner has a lot riding on this week.

The plan, which will use $100 billion of TARP funds, has two parts intended to revive the anemic financial system—the Public Private Investment Fund (PPIF) for Legacy Loans and the PPIF for Legacy Securities. Both are aimed at residential and commercial real estate-related assets. Banks tend to hold the assets as loans and entities such as insurers, pension funds, mutual funds and individual retirement accounts tend to hold the assets as securities backed by loans. The Federal Deposit Insurance Corporation with Treasury will work to create PPIFs that will purchase “loans and other asset pools” from participating banks, and the FDIC will determine eligibility criteria. The FDIC will also be using contractors to help it analyze loan pools and determine the level of debt to be issued by the PPIFs (with leverage not exceeding a 6 to 1 debt-to-equity ratio). The FDIC will then auction off each loan pool to the highest bidder. Treasury will provide 50 percent of equity financing and the private sector auction winner will provide the other 50 percent. The private sector winner can obtain financing by issuing new debt, which the FDIC will guarantee, that is collateralized by the purchase.

The Legacy Securities program involves Treasury and the Federal Reserve creating PPIFs that will be managed by private sector fund managers. Treasury will hire five fund managers but may increase the number later. Initially, the eligible assets will be non-agency residential mortgage backed securities and commercial mortgage asset backed securities originated prior to 2009 with a “AAA” rating at origin. Treasury will provide matching equity capital, and debt financing will come from both the Fed’s TALF program and Treasury.

The application deadline for fund managers is April 10th. Interested applicants must be headquartered in the United States, show they can raise at least $500 million of private capital, and demonstrate their experience investing in eligible assets, including a minimum of $10 billion currently under management. The selected fund managers will control the process of asset selection, pricing, liquidation, trading, and disposition. They will also have to report to Treasury monthly.

Treasury:  Public Private Investment Program (PPIP) (PDF)

Treasury: PPIP Fact Sheet (PDF)

Treasury:  Application for Treasury Investment in a Legacy Securities Public-Private Investment Fund (PPIF) (PDF)

Treasury:  PPIP for Legacy Loans FAQs (PDF)

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Paul - March 24, 2009 8:22 PM

Are loans eligible for Fannie or Freddie refinancing under the Home Affordable plan eligible for subsidy under the new asset guarantee program? If so, essentially, investor buys asset with govt guarantee then refinances into loan fully guaranteed by government.....

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